It would be helpful to have the latest estimate
of the cost of electricity liberalisation up to the present, including
an indication of whether these costs are within the allowable
costs described in the Government Response to the Tenth Report
1997-98

RECOMMENDATION G:
REVIEWOF
ALLOWABLE COSTS

What has been the outcome of the review of the
allowable costs of the PESs which the Response to the Tenth Report
said would be reviewed this year?

The 1997-98 estimates of the allowable costs
of electricity liberalisation given to the Committee are set out
in the table attached at Annex 1. The Committee used these figures
to derive a total cost (over five years) of £726 million.
The Pool set up costs subsequently increased from £59 million
to £84 million. Only half of this increase was an allowable
cost which could be recovered from suppliers (an increase of £2.5
million a year over five years). This was more than compensated
for by a reduction in Pool annual operating costs from £20
million to £10 million, of which only half (£5 million)
is recoverable from suppliers.

The Committee noted that PESs continued to dispute
the level of allowable costs claiming that costs would actually
be higher. As a result the Committee recommended that the DGES
use the review of price restraints in 2000 as an opportunity to
reassess the PESs' allowable costs. As recommended by the Committee,
Ofgem reviewed the PESs' allowable costs for set up. Having considered
the PESs' arguments, Ofgem considered it appropriate to extend
the life of the set-up cost allowances for a further two years,
to 2004-05, adding an extra £136 million to the PES allowances.

The revised PES set-up cost allowances, together
with the revised Pool set up allowable costs, increase the total
costs by £148.5 million. This is offset to some extent by
the reduction in Pool annual operating costs. Because the revised
PES allowable set up costs have been extended for a further two
years the annual allowable costs reduced slightly from £155
million to £152 million. (Revised costs are shown in Annex
2). The extent to which companies will be able to recover supply
business costs from customers will depend to a great extent on
the development of competition.

These costs need to be set against the benefits
to customers. 6.5 million customers had changed their electricity
supplier by June 2000. These customers have together seen their
bills fall by some £294 million since the start of competition.
Customers who have not switched are also paying lower prices overall
by some £450 million (largely as a result of Ofgem's reduction
in price caps).